1-855-514-9358Divorce or separation is a common cause of bankruptcy or a consumer proposal for many individuals in Ontario.
It’s not terribly surprising that divorce leads so many people to financial trouble – you move from managing a household budget with two incomes to trying to make ends meet with only one income. Expenses certainly don’t get reduced by 50% just because someone has moved out, so there’s a difficulty in adjusting to the new “normal” of a reduced household income. Add the legal and other costs associated with separation and divorce and you can see why bankruptcy becomes necessary.
Filing for bankruptcy during a divorce or separation can certainly have an impact on the bankruptcy process.
Alimony Payments Not Discharged
A common part of divorce or separation are child support or alimony payments. Filing for bankruptcy does not remove your responsibility to make alimony or support payments, and if you are behind in the payments, filing for bankruptcy does not erase the obligation to pay back alimony payments. However, the amount you pay each month in either child support or alimony is deducted before determining surplus income and calculating your bankruptcy payments.
Joint Debts & Bankruptcy
When separating or divorcing, always keep in mind that you are liable for any joint debts that you may have with your ex. Just because you didn’t use the joint credit card doesn’t mean you aren’t responsible for the debt. Banks will hold each of you fully responsible for the entire debt (meaning you can’t agree to split the debt). What this means is that if you file for bankruptcy and there are joint debts, the bank is likely going to pursue your former spouse for the entire balance of the debt. A divorce decree or separation agreement cannot erase a joint debt obligation.
If, as part of your separation you’d like to try to “split” your debts, you would have to get the bank to formally agree to this – usually by way of the bank issuing two new separate loans to pay off the joint loan. Banks do not have to agree to this, and may not.
Assets & Equalization Payments
This is where bankruptcy and divorce or separation issues become a bit more complicated. A few things to talk to your trustee about:
- Unlike alimony and support, under current law equalization payments (where you agree to pay back a spouse because you retained certain assets) are eliminated by filing bankruptcy.
- Determining ownership of assets in a divorce and bankruptcy is based on the timing of each. If bankruptcy occurs first, your assets become part of your bankruptcy estate and are no longer available to distribute in a divorce. If you are divorced first any assets transferred in the divorce are not available to the trustee (as long as the transfer is not considered a fraudulent transaction).
Always talk to your bankruptcy trustee about any possible joint debts or outstanding divorce costs to see how they will affect both yourself, and your ex-spouse, when filing bankruptcy.
I am considering bankruptcy, I have been assessed by CRA and fighting for 5 years, a very unfair fight, I do not have nor never had or will have the amounts they are seeking. Over 1 million… I have been separated for 4 years, but not divorced yet, I am still paying all the mortgage on the matrimonial home and taxes, I have 2 children still at home, one is still in school. I am still joint with my ex on the house and mortgage. How will bankruptcy effect this.
C.G.: If you file bankruptcy, you can continue to pay the mortgage on your jointly owned home. The issues will be whether or not CRA has already placed a lien on the home (liens are not automatically discharged in bankruptcy) and whether or not there is equity in the home (which you would lose in a bankruptcy). You should consult an insolvency lawyer or bankruptcy trustee for further information.
My ex has filed for bankcruptcy during our mediation for separation of debt and home.
I have been paying for the home for 2 years now. When he left we had home evaluated for mediation purposes and at the time there was no equity in the home. Now 2 years later house paid down by me and home value increased.
Our children and i live in this home and we’re going to continue once documents to remove his name from title signed.
My question is how does this affect me??? And my home?.
In our agreement he was signing home to me because at the time there was like I said no equity and therfore no buy out.
Thank you
The short answer is that you should consult with your family law lawyer. For bankruptcy purposes, your ex’s bankruptcy trustee is required to realize on any assets held by the bankrupt on the date of bankruptcy, so if the house had equity on the date of bankruptcy, the trustee would be required to turn that equity into cash. If there is a valid separation agreement in place, approved by the court, giving you the house, it is unlikely that the trustee would take any action, which is why it is very important that you consult your lawyer and ensure that the proper documentation is prepared to protect your interests.
Both my ex and I filed bankruptcy during our separation and both left the house. My trustee turned the house back over to the bank because there was no or negative equity.
My ex then made a deal with the bank to return to the house and re-assume the mortgage payments. (We are both co-borrowers on the mortgage and we were both joint tenants on the deed.)
However, during that deal – the bank repossessed the house so that they could take title, and then sold my half of the house back to my ex. However, they still kept me on the mortgage and did not re-write it. ( I received no written notice that this happened. I found this out only recently).
He got behind several times on the mortgage since then and the bank has continued to report on my credit bureau delinquent payments post bankruptcy.
I specified in writing that I did not wish to renew the mortgage when it came up for renewal because of the divorce and my bankruptcy. The bank agreed in writing that they would not renew the mortgage. But then they did anyway.
So now my name is signed on for another 5 year term. How do I ever recover from my bankruptcy if they are still reporting to my credit bureau that I am delinquent? They send me letters when he is in default, but they did not send me any renewal notice or anything else to do with the mortgage.
When a bank forecloses on a house and then “sells” it, does a new financial agreement not need to be in place to facilitate the “sale”?
Not my house anymore, not my debt anymore, not even my spouse anymore. Have my legal rights been violated in any way?
Thanks,
Hi Kari. Yes, it would appear that your legal rights were violated, because somehow your name got attached to what is effectively a new mortgage without your knowledge. I would start by talking to the trustee to see if there is anything they can do. Next I would talk to the bank, and advise them that you surrendered the house as part of your bankruptcy, and therefore have no interest in it or the mortgage. If that doesn’t work, I would suggest having a lawyer write a letter to the bank; that may get their attention.
I have been formally separated for 11 months without any progress on getting the ex to share the marital debt of aprox $88000. It is all in my name and I am now pursing a consumer proposal. If/when I finally get him to agree to paying for half of that debt, assuming my consumer proposal has been accepted, who is he paying? and will the amount he pays be based on the consumer proposal debt or the actual marital debt?
Hi Cheryl. Legally, since all of the debt is in your name, it’s your debt, so it makes sense for you to file a consumer proposal to deal with it.
If your ex-spouse agrees to help you with it, presumably he will be paying the money directly to you, and you will then use it to make the payments on your consumer proposal.
Spouse and I declared bankruptcy while married. That was 3 years ago. We have since separated and are now looking to get a divorce. While married, my income supported family expenses which allowed part of his to be used for his company pension plan. Does the bankruptcy impact my claim during our divorce to split the pension equally.
Hi Tina. Since the separation is happening after the bankruptcy, it is unlikely that the bankruptcy will impact pension equalization. However, that is a question best asked of your family law lawyer, since they will be more familiar with the legalities.
if my spouse and I separated and then filed a joint consumer proposal after separation, can I still claim equalization when I deal with my divorce?
Hi Kerri. This is a difficult question to answer, because it depends on the timing and other factors, so I would strongly recommend that you review this with a lawyer experienced in these matters before making a decision. In general terms, a consumer proposal deals with all unsecured debts and allows you to retain your assets (an equalization payment would be an asset), but if your ex is also filing a proposal it may discharge their equalization obligation, so it is critical that you get independent legal advice before making this decision.
Hi this might be an odd scenario, so my uncle Is going bankrupt to pay off investors from his failed business, has to sell his house and his cars to pay, and explained to me that to protect some of the assets of the home he will have to separate legally from his wife, and have her living with his brother (my father) on paper only. Is this a form of fraud and is there any legal implications I should be worried about? She would not be residing in my fathers home, and would be legally (on paper) be living there. She has no job and no income.
If it is a bona fide (real) separation and the Family Court signs off on the division of assets BEFORE your uncle files for bankruptcy then his plan may work.
If he files for bankruptcy BEFORE he does anoything in Family COurt then the assets will no longer be his to give away, they will be under the control of his bankruptcy trustee.
If the crediotrs can prove it is a fake separation then he will end up in a world of trouble, particularly if he has filed for bankruptcy and the creditors use the Bankruptcy Court to prove the fraud.